Shareholder & Partnership Basis
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CPA Regulation (REG) › Shareholder & Partnership Basis
Payments from a partnership to a partner for services or the use of capital without regard to partnership income are:
Guaranteed payments
Salaries
Contractor checks
Loans
Explanation
Guaranteed payments are essentially salary payments to a partner in the practice, however, they are treated differently as it is a payment to an owner of the entity.
Lemon owned 2,000 shares of Spectrol Corp. common stock that were purchased in year 1 at \$10.50 per share. In year 4, Lemon received a 5% non-taxable dividend of Spectrol common stock. In year 5, the stock split 2-for-1. In the current year Lemon sold 800 shares. What is Lemon's basis in the 800 shares of stock sold?
\$4,000
\$8,000
\$8,400
\$16,800
Explanation
The original basis in the stock was \$21,000 (2,000 shares at \$10.50/share). The stock dividend of 5% increased the number of shares by 100 (2,000 * 5%), bringing the total shares to 2,100, while the basis remained the same (\$21,000) and consequently the per share value decreased to \$10/share. The stock split doubled the number of shares from 2,100 to 4,200, but the basis remained the same and the per share value was halved (from \$10/share to \$5/share). As a result, the 800 shares sold had a basis of \$4,000 (800 shares * \$5/share).
Mark and Mary formed MM, Inc. as an S corporation. Each contributed \$50,000 in exchange for five shares of corporate stock. In addition, MM obtained a \$60,000 loan from a local bank that was still outstanding at the end of the year. In MM's first year of operation, it reported a loss of \$20,000 and did not make any distributions to the shareholders. What is Mark's basis in his MM shares at the beginning of the second year?
\$40,000
\$50,000
\$70,000
\$100,000
Explanation
Mark began with a basis of \$50,000, which was decreased by his 50% share of the operating loss of \$20,000. As a result, his basis was \$40,000 at the beginning of the second year. For S corporations, unlike partnerships, liabilities assumed by the corporation do not increase shareholders’ basis in the organization.
Steve received a one third interest in a partnership by contributing \$3,000 in cash, stock with FMV of \$5,000 and a basis of \$2,000, and a new computer that cost Steve \$2,500. Of the following, which amount represents Steve’s basis in the partnership?
\$3,000
\$5,500
\$10,500
\$7,500
Explanation
Steve’s basis in the partnership is calculated as \$3,000 cash + \$2,000 stock basis + \$2,500 computer basis.
Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of \$16,000 and a fair market value of \$50,000. The land was subject to a \$24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace?
\$0
\$16,000
\$26,000
\$32,000
Explanation
Since Strom contributed property subject to a liability, where the value of the liability exceeded the property, Strom begins with a negative basis of $(8,000). Strom’s partnership basis is increased by the assumption of the 25% share of the liability (=\$6,000), bringing Strom’s basis up to $(2,000). Since a negative basis is not possible, Strom would have to recognize a gain to bring the partnership basis up to zero.
Gary is a 50% partner in ABC Partnership. Gary’s basis in ABC at the beginning of the year was \$5,000. ABC made not distributions to the partners during the year and recorded the following items: \$20,000 ordinary income, \$8,000 tax exempt income, and \$4,000 portfolio income. What is Gary’s tax basis in ABC at the end. Of the year?
\$16,000
\$10,000
\$12,000
\$21,000
Explanation
A partner’s basis is increased by the partner’s share of partnership ordinary income, separately stated income, and tax exempt income. $5,000 + 50% * ($20,000 + $8,000 + $4,000) = \$21,000